Co-branding credit card partnerships has never been smooth sailing, but competition has clearly gotten tougher amid Apple Pay's launch.
Apple Inc.'s success in getting a cut of interchange fees for Apple Pay is a key reason retailers are seeking better deals with the card brands, some observers say. Others say a low interest-rate environment has allowed banks to turn more attention to card products and their perks, thus sparking a flurry of changes to co-branding relationships.
"At any one time, about 20% of issuers are shopping their co-branded deals because of contract expirations," said Richard Crone, chief executive of San Carlos, Calif.-based payments consulting firm Crone Consulting LLC. "Since the Apple Pay announcement, all of them are either shopping or renegotiating their co-branded deals."
Apple was able to gain a lower rate with 500-plus issuers and their payment networks, when retailers have been unable to do so during decades of litigation costing billions of dollars, Crone said.
Issuers must also redefine the cut given to Apple for Apple Pay, Crone said. Someone has to pay Apple, pay for tokenization services from Visa, MasterCard and American Express, and also pay separate issuer/processors for back-end accounting related to Apple Pay transactions, Crone said.
"None of this is specified in the existing co-branded contracts, so it's all new and all negotiable," Crone added. "Thus, the shopping frenzy created by Apple Pay."
American Express finds itself at the forefront of the most recent co-branding maneuvers.
In mid-September, Capital One Financial Corp. and MasterCard revealed a deal with Costco Wholesale Corp. in Canada to issue a co-branded card when the retailer's contract with American Express ends this year.
Then, earlier this month, Bloomberg News reported that Costco was looking for an issuer and payments network in the U.S. to possibly replace American Express. Considering Costco has 468 stores in the U.S. and only 88 in Canada, losing that relationship in the U.S. would be a bitter pill for Amex to swallow.
"While I cannot comment on the ongoing business negotiations in the U.S., I can tell you that there are no changes in our relationship with Costco U.S.," said William Tsang, director of corporate affairs and communications for American Express.
American Express spokesperson Elizabeth Crosta also could not comment about the current Costco situation, but did acknowledge that "there is a lot of competition in co-brand now. It's just a different market dynamic."
While Apple Pay has drawn significant attention since its debut last month, it's more likely that intense competition in co-branding negotiations is the result of "banks re-engaging in the credit card business in general," said Michael Taiano, who keeps close tabs on Amex in his role as senior research analyst with Burke & Quick Partners LLC.
"In part, it has to do with going after the upper-end customer data base," Taiano said. "The Card Act made it really difficult to underwrite sub-prime borrowers, so everyone is going after that transactor base again," Taiano said. The Card Act, signed into law by President Barack Obama in 2009, essentially mandates a fair and open system for extending credit.
But basic economics still come into play any time a merchant co-branding contract is about to expire, Taiano added.
"Merchants have some bargaining leverage and as these deals come up for renewal, especially the bigger ones," he said. "They are pitting one card issuer against the other as to who is going to offer them the best pricing."
American Express faces another obstacle, as JetBlue Airways Corp. said it was talking to other potential suitors to replace American Express as its credit card partner.
MasterCard, meanwhile, landed a deal with Walmart in early April to handle the mega-retailer's credit card transactions, ending Walmart's nine-year relationship with Discover.
In addition, MasterCard landed Target for co-branded chip-and-PIN credit and debit cards late in April.
Not to be outdone, Visa Inc. appeared poised in early November to replace MasterCard as the card-processing network for Best Buy Co. MasterCard had worked with Best Buy for eight years.
Neither MasterCard nor Visa replied to inquiries about co-branding partnerships or trends prior to deadline.
Paul Martaus, a merchant acquirer consultant and industry researcher, said retailers have changed co-branding partners in the past, but he calls the current situation "a phenomenon" that has a different feel to it.
"I can't pinpoint what is, but it seems that Apple Pay has thrown so much chaff into the air, and retailers are starting to understand that the payments industry needs them as much as they need the industry," Martaus said.
Retailers still remain at a disadvantage because the banks operate the system, but recent developments with Apple Pay and the uncertainty over what the Merchant Customer Exchange will ultimately bring to the table with its CurrentC mobile pay system indicates the beginning of a new era, Martaus said. "Things are changing out there."